Filing summary: iStar Inc. 2018 Form 10-K
Important entity and period note: The supplied filing is iStar Inc.’s annual report for the year ended December 31, 2018, not a Safehold Inc. Form 10-K. Safehold (SAFE) is discussed as an iStar-managed investment. The filing includes quarterly data for Q4 2018.
Business context and reporting period
iStar is a REIT investing in and financing real estate through four segments: real estate finance, net lease, operating properties, and land and development. It reported on a consolidated basis for the year ended December 31, 2018, with 2017 comparisons. Management’s strategy emphasized monetizing legacy assets and directing more capital toward ground leases and SAFE.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $798.1 million | $679.2 million |
| Net income (loss) | $(18.3) million | $180.2 million |
| Net income (loss) allocable to common shareholders | $(64.8) million | $110.9 million |
| Basic and diluted loss per share | $(0.95) | Basic and diluted income per share: $1.56 |
| Adjusted income allocable to common shareholders (non-GAAP) | $222.3 million | $214.6 million |
| Cash flows from operating activities | $(24.1) million | $101.5 million |
| Cash flows from investing activities | $778.9 million | $263.1 million |
| Cash flows from financing activities | $(457.9) million | $(41.5) million |
- Revenue increased 18%. Land development revenue rose to $409.7 million, including two large land-parcel sales; operating lease income increased 11% to $208.2 million. Interest income fell 8% to $97.9 million as higher-yielding loans paid off.
- Costs and expenses were $994.1 million, including $147.1 million of asset impairments, versus $32.4 million in 2017. The resulting reported loss contrasts with adjusted income, which increased modestly; adjusted income is a company-defined non-GAAP measure, not cash available for distribution.
- Land development revenue less cost of sales was approximately $59.5 million, or about 14.5% of land development revenue. Overall net margin was negative, with net loss equal to about 2.3% of revenue.
- At year-end, total assets were $5.01 billion, debt obligations net were $3.61 billion, and total equity was $1.06 billion. Cash and cash equivalents were $931.8 million; the revolving facility had $325 million available. Net debt using reported cash was approximately $2.68 billion.
- Weighted average cost of debt was 5.5%, compared with 5.6% in 2017. iStar reported below-investment-grade unsecured credit ratings.
- Real estate finance loans and other lending investments, net, were $988.2 million. Non-performing loans declined to $26.3 million from $176.9 million; the total loan-loss reserve was $53.4 million.
- For Q4 2018, revenue was $140.2 million and net loss attributable to common shareholders was $115.5 million, or $1.70 per share.
Material changes versus the prior comparable period
- Reported net income moved from $180.2 million in 2017 to a net loss of $18.3 million in 2018. The comparison is affected by the 2017 $123.4 million gain on the SAFE ground-lease transaction and $123.4 million gain from discontinued operations, while 2018 included substantially higher impairments.
- iStar reduced legacy assets from 35% to 20% of gross book value and received $735.6 million of proceeds from legacy assets, reporting $137.8 million of aggregate gains net of noncontrolling interests. These gains were partly offset by 2018 impairments.
- On June 30, iStar obtained control of the Net Lease Venture and consolidated it, recording a $67.9 million gain. This also increased reported net lease assets and debt.
- At December 31, the company owned about 41.8% of SAFE’s common stock. On January 2, 2019, it invested a further $250 million in SAFE OP units, bringing its fully diluted economic interest to approximately 65.5%; voting power remained capped at 41.9%.
- The 2018 adoption of accounting guidance for derecognition of nonfinancial assets increased opening retained earnings by $75.9 million. This included a $55.5 million step-up associated with the retained SAFE interest.
Outlook, risks, contingencies, and unusual items
- Management expected capital to remain available in traditional commercial real estate lending in 2019, but described interest-rate and equity-market volatility and said it was taking a cautious approach. It expected to prioritize ground-lease activity, SAFE-related transactions, and legacy-asset monetization. The filing provides no specific earnings guidance.
- Management expected to use unrestricted cash mainly for investments and working capital. It anticipated $100 million to $150 million of portfolio capital expenditures over the next 12 months, including about $65 million for vertical construction, and expected to fund most of $489.3 million in maximum unfunded commitments over two years, subject to conditions.
- Real estate finance loans with a $516.0 million carrying amount were scheduled to mature during 2019, excluding borrower extension options. The $375 million of 5.0% notes due July 2019 was called for redemption on March 7, 2019; management stated there were no other debt maturities in 2019.
- Key risks include refinancing and liquidity access, debt covenants and cross-default provisions, below-investment-grade ratings, interest-rate and credit risk, asset valuation and further impairment, legacy-property sales, development and entitlement execution, and tenant or borrower defaults. Unsecured debt covenants include a 1.2x minimum unencumbered-assets-to-unsecured-debt ratio.
- SAFE transactions involve related-party conflicts. The January 2019 investment and amended management agreement were approved through independent-director processes, but the filing cautions that terms may not be as favorable as third-party terms.
- Unusual asset issues included a $47.1 million impairment on a Chicago mall following an anchor tenant closure and lower in-line tenant rents; a $23.2 million impairment on a Coney Island entertainment property with deteriorating performance; and a $25.0 million impairment on Long Beach, New York land amid revoked zoning and permits and ongoing litigation.
- The company reported ordinary-course litigation, including foreclosure matters, and stated that it did not believe any pending proceeding would materially adversely affect its consolidated financial statements. The auditor issued an unqualified opinion; management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Confirm the intended issuer: this filing covers iStar Inc., not Safehold Inc.
- Review the quality and repeatability of 2018 earnings, particularly the impact of $147.1 million in impairments, land-sale timing, the $67.9 million consolidation gain, and non-GAAP adjustments.
- Assess liquidity after the subsequent $250 million SAFE investment and redemption of the $375 million 2019 notes, including funding needs for loan maturities, development spending, and commitments.
- Check performance and valuation of major legacy assets, including the Chicago mall, Coney Island property, Long Beach land, and projects marketed for sale.
- Evaluate SAFE’s growth, iStar’s effective economic and voting interests, management-fee terms, and related-party governance protections.
- Monitor debt-covenant headroom, refinancing access, and the effects of interest-rate changes on asset yields, funding costs, and collateral values.